Hemaraj

Hemraj Plc (HEMRAJ)  

Hemaraj’s 9M12 land presales were stellar, surging 61% yoy to 1,952 rai or 85% of its FY12 target. Rental demand for factories/warehouses sustained its uptrend with a 40% jump in rental area. Utilities volume was up 13% yoy during 9M12. Given the official start of GHECO One’s operations in Jul 2012 and the favourable 9M12 trends for backlog, revenues and margins, we upgrade FY12-14 EPS by 17-40%. This, plus a rollover to end-13, adds 50% to our target price which is still based on 13x P/E, 1 s.d. above the mean. The strong EPS growth outlook and favourable newsflow underpin our unchanged Outperform call. 

What Happened
At an analyst meeting, Hemaraj
retained its bullish outlook and FY12
land presale target of 2,300 rai
despite the buoyant 9M12 presale of
1,952 rai (+61% yoy) or 85% of the
full-year target and strong enquiries
on land purchases from both new
customers and existing customers
with expansion plans. Hemaraj
conservatively targets FY13 land
presale of 1,500 rai. More aggressive
expansion of the rental business is
planned through its ready-built
factories (RBF) and logistics parks
(warehouses for rents). 9M12 rental
area increased by 62,997 sq m or 40%
from the end-FY11 cumulative level.
9M12 utilities volume rose 13% yoy.
Capex is THB5bn-6bn/year with a
land budget of THB1.0bn or about
3,000 rai. Gross gearing is expected
to rise to 1.2x by year-end from 1.07
at end-2Q12 to support business
expansion. Management guided for
land transfer of 400-500 rai in 3Q12
and 500-600 rai in 4Q12. Landbank
is now 5,500 rai and will increase by
4,000-4,500 rai worth THB1.7bn
(with MOU signed) by year-end.

What We Think
The 9M12 trend of strong land
presale, an expanding rental business
and official operation of GHECO One
is highly positive for Hemaraj and
suggests rising earnings resilience.
We are now forecasting FY12-14 EPS
CAGR of 75%. Our forecast implies
that 56% of FY12 earnings will come

What You Should Do
Stay invested. Hemaraj’s valuation is
attractive at 22% discount to its
THB4.1 NAV and 10x P/E. The
near-term catalysts are earnings
recovery in 2H12 and newsflow on
land presale, the Koh Lan project
masterplan, landbank acquisition and
strong BOI data.

2,300-rai target retained

Hemaraj retained its FY12 land presale target of 2.300 rai despite strong 9M12
land presale of 1,952 rai (+61% yoy) which accounted for 85% of its full-year
target. The strong growth came from both new customers and existing
customers with production expansion plans. The main contributors were
Japanese customers (43% of 9M12 land presale) and the automotive industry
(29%). 9M12 rental business also showed positive developments, with rental
space from ready-built factories (RBF) and logistics parks rising by 62,997 sq m
or 40% from FY11’s 159,038 sq m. Healthy demand for utilities service resulted
in a 9M12 volume increase of 13% yoy.
Even though Hemaraj maintained its FY12 land presale target, it revealed that
there are enquiries for more than 1,000 rai of land, which implies upside to its
FY12 target. This is highly positive as it will be a buffer for revenue in FY13. The
backlog amounted to THB3.5bn at end-3Q12 which will support revenues in
2H12-FY13.

17-40% EPS upgrade
We upgrade our FY12-14 EPS estimates by 17-40% to reflect the positive points
that emerged during the 3Q12 preview for analysts. We raise our assumption
for land sales and service income from both the rental and utilities businesses.
While we increase the FY12 contribution from GHECO One due to a
higher-than-expected FX gain (part of shared income from GHECO One), we
lower its FY13 contribution to reflect its planned maintenance shutdown for a
month in 1H13. Overall gross margin estimates for FY12-13 are cut to reflect
lower service gross margins due to wage hikes. Land gross margins are higher
from 2011 onwards and are expected to be sustained at 45% due to Hemaraj’s
ability to increase prices (YTD up already 20%).

Strong earnings recovery expected for 3-4Q12
Even though land transfer in 3Q12 is expected to fall to 400 rai (THB900m
land revenue) from 480 rai or THB1.0bn in 2Q12, we expect 3Q12 net profit to
surge 240% yoy and 461% qoq to THB525m, excluding an estimated FX gain of
THB100m. The strong yoy growth mainly reflects higher income from both
land sale and service income combined with contribution from GHECO One
which started commercial operations on 26 Jul 2012. Still, we anticipate a
penalty charge of THB24m from EGAT owing to the delay in commercial
operation of GHECO One. 4Q12 net profit is projected to rise to THB694m
(+81% yoy, +32% qoq), thanks to an expected larger land transfer of 550 rai,
the continued rise in service income and a full-quarter contribution from
GHECO One.

Landbank acquisition in progress
Thanks to strong demand for industrial land, Hemaraj has seen a rapid
depletion of its landbank from 7,500 rai as at end-12 to 5,500 rai. This was
especially the case for Hemaraj’s Saraburi Industrial Land estate (SIL) which
benefited from manufacturers’ relocation from flooded areas in central
Thailand. We are less concerned about this as Hemaraj has signed an MOU
with local landlords to buy approximately 4,000-4,500 rai of land worth
THB1.7bn. The company is not revealing the location to avoid land price
speculation and competition. We expect the land transfer to be completed by
end-12. The additional landbank should raise the NAV/share by THB1.14 from
our current estimate of THB4.10 to THB5.24.
The Million Island project on Koh Lan island in Pattaya is another promising
asset that is planned for integrated resort development (hotels, game centre,
amusement park, residential, etc) worth around THB10bn. The masterplan is
expected to be announced by 2Q13. It is now undergoing an Environmental
Impact Assessment (EIA) study. The first phase of construction is anticipated
to start in 2014.

Reiterate Outperform with higher THB4.14 target
Our target price rises by 50% because of our FY12-14 EPS upgrades and a
rollover to end-13. Our basis remains 13x P/E, 1 s.d. above the mean to reflect
Hemaraj’s pole position in industrial estate sales in Thailand. Amata is in 2nd
place with 28% market share. Investors should stay invested in Hemaraj given
its strong EPS growth outlook and attractive valuations of 22% discount to NAV
and P/Es of 10.8x CY13 and 9.8x CY14. These P/Es are around the 5-year mean
of 10.7x even though the company’s prospects are on the rise.
A strong turnaround in 2H12 and newsflow on land presale, the Koh Lan
project masterplan and landbank acquisition are potential near-term catalysts.
Another potential catalyst is continued buoyant BOI data.